PUNITIVE DAMAGES SETTING STANDARDS FOR LEGAL WILD CARD

By Daniel B. MoskowitzOctober 1, 1990

Sometimes, reimbursement just isn't enough.

The primary purpose of most lawsuits among businesses or individuals is to put the plaintiff back in the position he was in before the dire events which caused the dispute in the first place -- to collect damages that will make up the lost wages and the medical bills and, in some rough approximation, the suffering and inconvenience.

But the law has long recognized that there are times -- relatively rare times -- when the person who caused the harm acted so outrageously that he should be punished for his actions.

Usually it is the government, using criminal laws, that hands out punishment. But a private plaintiff in a tort suit can play the role by persuading a court to award not just compensatory damages but also punitive damages. In those cases, the private plaintiff is doing society's job, but also lining his own pockets.

Oddly enough, there are few standards for the courts to measure when conduct calls for punitive damages. The U.S. Supreme Court on Wednesday will hear oral arguments in a case that may set such standards. It will be the fourth time since 1986 that the justices have looked at the question, but in each previous case there were procedural reasons not to hand down a definitive ruling.

This time all sides expect some detailed guidelines, perhaps as soon as the end of this year. Western civilization has gotten along for centuries without detailed standards on punitive damages, primarily because they were so rarely awarded. But lawyers for plaintiffs have been getting increasingly adept at winning such bonanzas for their clients.

The response: howls from the clients -- manufacturers of consumer goods, insurance companies, accountants -- that the system is in need of reform. Punitive damages, they say, are a wild card in the judicial process that may be played at any time and for virtually any amount.

That makes it impossible for executives to figure their impact in assessing the total cost of producing a product. Rather than take the risk, some 50 percent of the companies responding to a 1988 survey of the Conference Board said they had dropped product lines; 40 percent said that fear of punitive damages was the primary reason they decided not to go forward with new products.

Monsanto Co., which has been slapped with some big product liability punitive damages awards and has been one of the most outspoken critics of the current system, said it decided against commercialization of an asbestos substitute because it was worried about the liability suits it would engender.

Those on the other side -- primarily plaintiff lawyers and consumer groups -- insist that nothing is wrong with the system now in use. Punitive damages are never awarded, they point out, unless a jury is convinced that the defendant not only injured the plaintiff but also acted so outside the bounds of normally acceptable behavior that the person or company should be punished.

They say one solution to punitive damages is for companies to market only safe products and to treat customers, employees and the public with care. What business would really like is to see punitive damages totally banned -- something which the legislature did in New Hampshire and the courts have done in Massachusetts, Louisiana, Nebraska and Washington state.

Short of that, though, they have an arsenal of other changes they would like to see in the law to at least make it tougher for plaintiffs to win punitive damages.

The changes range from legislating an absolute limit to the size of punitive damages -- Alabama has a limit of $250,000, Virginia of $350,000, Kansas of $5 million or the defendant's annual gross income if it is less than that amount -- to erecting complex procedures in which a jury would first decide if a defendant is liable, then go through a trial on whether punitive damages are indicated, and then have a third hearing on the amount to be awarded.

None of this is directly related to this week's Supreme Court hearing. In the first place, rules on tort suits are set by the states, and they have great freedom in making the kind of policy choices at the heart of much of the debate.

But the justices do hand down the definitive interpretations of the U.S. Constitution, and business says that at times punitive damages are so bizarre as to be unconstitutional.

Business certainly has an advantageous case in which to make its points. The underlying dispute at the high court is between city employees of Roosevelt, Alabama, and an insurance agent who collected premiums for health insurance but did not turn it over to the insurance carrier.

The jury, relying on what the judge called its "moral discretion," returned a verdict for almost $1.1 million in punitive damages. But the defendant ordered to pay the damages was neither the agent nor the health insurance company, but Pacific Mutual Life Insurance Co.

The same agent had sold Roosevelt employees life insurance from Pacific Mutual and worked out of Pacific Mutual's branch office -- enough connection for the jury to decide that the sales agent was acting in the name of the life insurance company.

Both the trial judge and the Alabama Supreme Court found the jury's decision legally reasonable. Essentially, Pacific Mutual, supported by a cadre of other companies and trade groups interested in limiting punitive damages, is arguing at the high court that without clear standards for when punitive damages are proper, there is no due process of law.

They say that the standards have to also address the amount of a punitive damage award, to keep it in line with the actual monetary loss suffered by the plaintiffs.

Moreover, Pacific Mutual and its allies propose that even with standards, punitive damages are really more like a criminal sanction than a civil one, and so corporations facing such punishment should have the full protection given criminal defendants.

That would mean that they could not be found liable, as they can now, merely because the plaintiff had more evidence on its side that the defendant had.

Daniel B. Moskowitz is a Washington editor for Business Week newsletters.